Perhaps the SEC and Citigroup are celebrating the settlement that Federal Judge Jed Rakoff approved on Tuesday. But neither should be.
It’s true, a fine of $285 million (on charges that Citi misled investors on mortgage investments) offset by gains of $160 million while customers lost $700 million—plus winning an effective shield against customer lawsuits—isn’t a bad deal for Citi, at least in the short run. But what should worry the financial behemoth and every other U.S. corporation is the precedent this ruling may set.
It’s true that outside narrow categories like insider trading, the SEC has been light on enforcement since the beginning of former SEC Chair Chris Cox’s tenure in 2005 in the critical run up to the financial crisis. Wall Street firms, in particular, have received multiple passes—accused of breaking laws, agreeing not to break them, accused again of breaking the same laws, agreeing again not to break them, and on and on.
But the SEC enforcement pendulum could swing back one day. In days gone by, the SEC had been quite willing to pin the largest corporations to the wall. In the 1980s and early 1990s, junior SEC staffers would scour the morning newspapers looking to find the biggest companies that might have engaged in potential wrongdoing. Getting the chance to work on a large case meant career advancement in those days.
In the case just decided, Rakoff had asked the SEC and Citi to provide facts underlying the SEC’s accusations that Citi failed to provide adequate disclosures to customers about risky products. He wanted “sufficient evidence,” he said, to determine whether the settlement was “fair, adequate, reasonable and in the public interest.” The SEC and Citi did not want to provide that information, and so they teamed up and appealed. In June, an appeals court ruling accused Rakoff of overreaching.
In his final opinion, Rakoff quoted a most draconian section of the appeals court ruling: “Finally, we note that to the extent that the S.E.C. does not wish to engage with the courts, it is free to eschew the involvement of the courts and employ its own arsenal of remedies instead.”
This ruling means “settlements reached by governmental regulatory bodies” will “be subject to no meaningful oversight whatsoever,” Rakoff wrote. That would seem to leave all the cards in the hands of the SEC. So, should the regulator be happy with the ruling?
That depends on the direction the political winds blow. With judicial oversight of the SEC minimized, members of Congress may feel compelled to step into the breach. Instead of facing a thoughtful judge, the SEC and its accused may find themselves under oath in front of an angry Congress, captured for public display on C-Span.
I know the chances right now seem remote. But, as the old saying goes, be careful what you wish for.
Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (www.thevaluealiance.com) , a board education and advisory firm.
